Returns to scale

Returns to scale refers to a property of production that examines changes in output as a result of a proportional change in all inputs. Returs to scale includes 3 laws
Increasing returns to scale - when a proportional increase in all inputs results in an increase in output by more than the proportion
Constant returns to scale - when a proportional increase in all inputs results in an increase in output by the same proportion.
Diminishing returns to scale - when a proportional increase in all inputs results in an increase in output by less than the proportion

Short example:

Returns to scale is possible in long run only.
There are 2 inputs only and both inputs are variable.
When one unit of all variable inputs are increased , and new value for output comes out to be:
Increase in output is Same as the previous output given = a constant return to scale (CRTS)


















Land

Labour

Output

Increase in output

1

1

10

10

2

2

20

10


Addition made by an extra unit of land and labour is the same as the previous.

Increase in output is Less than the previous output given = a decreased return to scale (DRS)


















Land

Labour

Output

Increase in output

1

1

10

10

2

2

18

8


Addition made by an extra unit of Land and labour is less than the previous.


Increase in output is More than twice previous output given = an increased return to scale (IRS)


















Land

Labour

Output

Increase in output

1

1

10

10

2

2

23

13


Addition made by an extra unit of land and labour is more than the previous.

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